Tag Archives: rule of 72

RRSP Deadline and Choices

It’s less than two weeks until the RRSP deadline for 2016 contributions. A couple of things you should remember and consider:

If you’re in debt, focus on paying off your debts, instead of savings. I’m not saying take the next decade with that, but stop everything else and get a single-minded focus on paying off your bills. Then go back and start with all that money you’re no longer paying to your car, line of credit, or credit card and start saving with amounts nobody else can match.

If you just put your RRSPs into savings, you’re getting maybe half a percent interest. That isn’t going to work. There’s something called the Rule of 72. Take your return divided by 72 and that’s how long it takes for your money to double. So at half a percent, it’ll be 36 years. Better returns such as at least 8% will double your money in nine or so years. Of course, your age, how often there’s time for the money to double, and how much risk you can tolerate versus your age, other assets, and when you need the money matters a lot.

A big question is why don’t people invest properly and just put it into savings.

Researchers in California some years ago, led by Sheena Iyengar, set up tables to sell gourmet jams in front of a grocery store. One booth had six different jams available, the other had a wider selection of 24 jams on display and available for tasting. The purpose of the experiment was to determine whether quantity to choose from had any impact on how many sold. And did it ever – but in the opposite way: 30% of those who stopped at the six-jam booth made a purchase, but only three percent at the bigger booth made a purchase of some kind! We prefer to make quick decisions but that becomes impossible with 24 selections so we freeze and don’t make a purchase (or decisions) at all. The same holds true for investments. People want a choice but not an over-whelming choice or people will freeze and “think about it” without making a decision at all.

But then – not making a decision is still a decision.

Want to Be a Teenage Millionaire?

Do you want to make a deal with your parents or with yourself? You can spend every dollar you’ll ever make the rest of your life, because at age 20 you’ll already be set to be a millionaire. The only thing you need to do is save $9,300 by your 20th birthday. Nothing more – nothing less. After that, without getting into debt or touching these savings, you can spend every dollar you earn – if you choose to. And, if you also save a bit of each paycheque, it won’t be hard to reach two million dollars.

It’s the magic of compound interest and works with something called the Rule of 72. Simply take the rate of return on your investments and divide it by 72. That’s how long it will take for your savings to double. So, a 10% return doubles your money every seven years.

Saving that $9,300, investing it, and forgetting about it, at a 10% rate of return will double your money very quickly and very frequently:

Invested by age 20:                           $   9,300

At age 27 it doubles to:                    $ 18,600

At age 34 it doubles again to:         $ 37,200

At age 41 it’s:                                    $ 74,400

At age 48 it’s:                                    $ 148,800

At age 55 it’s:                                    $ 297,600

At age 62 it’s:                                    $ 595,200

And at retirement (age 67) it’s:        $1,003,000

You could also save $78 a month from age 20 to 67 to get the same million dollars. But that leaves 564 times you’re going to tempted to skip a month, be too broke, or forget to do it, and that risk is too big.

Why can’t every adult accomplish this? The answer is simply, because they didn’t save any money when they were much younger. The longer you wait, the less time your money has to double, and double up again. If you want the money when you’re 67 years old, but only start to save at age 41, you’ll end up with three fewer doubling periods and have about $150,000, instead of a million! In your case, at around age 20, the money has the time horizon to double almost seven times!

It’s your call – it’s your choice. If you don’t do it, you WILL remember having read this, as you start your retirement trying to live on $1,400 or so in monthly government pensions.

Graduate Your Teen As a Millionaire

Let’s face it, often our spending today comes with huge debts and monthly payments in the future, and they’re the biggest killers of our dreams and financial freedom.

So how do we avoid those debt traps for our kids? 85% of teenagers never take a course on credit or finances. That means they haven’t got much of a hope of being financially successful from the get-go.

The first thing most teenagers do when leaving the home is to take on a car payment, get a credit card, pay rent, and often have a student loan. But if you have teenager that’s about to leave the home, here’s a deal you can make that’ll insure their financial freedom for the rest of their life.

If the deal works out, they can spend every dollar the make for life. All the credit card debt, the cool car and whatever, because they’re already rich! Your teenager can spend every dollar they earn for the rest of their life – anytime and any amount.

Sounds irresponsible? Not at all – because that’s only half of the deal. The other half is that in order to do this, the only thing your teenager has to do is to save $10,000 by their 20th birthday. Nothing more – nothing less. After that, without getting into debt, or touching these savings, they can literally spend every dollar they make.

It’s the magic of compounding and works with something called the Rule of 72. It’s critical to know this, and to use it to your advantage, no matter what your age. Simply take your rate of return and divide it by 72 – that’s how long it’ll take for your savings to double. So at a 7% rate, it’ll double every 10 years, while a 10% rate will double it every seven years.

Do some lateral thinking of how you can achieve this. Maybe you can charge them rent and keep that in a savings account for them. Some people match whatever the teenager saves to a certain amount. There’s all kinds of ways you can make them focus on it and make it happen.

Why can’t we this as adults? Simple: Because we didn’t save the money when we were younger. The longer you wait, the less time our money has to double up and double up again. If we want the money when we’re 65 years old and start saving at age 50, our savings will only double a couple of times, so we have to save a lot more.

But your 20-year old just has to sit back with all the time in the world and watch his or her savings double again and again until it reaches $1.3 million at age 67, using a 10% rate, and it all started with a one-time saving of $10,000.

Oh, if only we had done this when we were their age. But one more thing: Because they’re teenagers, I’d recommend there’d be two signatures on the account – just in case they get the urge to take some money out…

The Rule of 72: At 10% it’s 72 divided by 10 = money doubles every 7 years
At 11% it’s 72 divided by 11 = money doubles ever 6 ½ years

At age Amount now saved through compounding interest just at a 10% rate
20… 10,000
27… 20,000
34… 40,000
41… 80,000
48… 160,000
55… 320,000
62… 640,000
67… 1,280,000

THAT is the best graduation present I can think of, and it’s not hard to do at all.